Valero Earnings: An Early Look

With hundreds of companies having already reported quarterly results, we're now in the heart of earnings season. The key to making smart investment decisions with stocks releasing their quarterly reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Let's turn to Valero Energy (VLO -1.01%). The refinery company has seen massive gains in the past year as high prices for refined products have outpaced relatively stagnant prices for West Texas Intermediate crude. But how long can the good times last? Let's take an early look at what's been happening with Valero Energy over the past quarter and what we're likely to see in its quarterly report on Tuesday.

Stats on Valero Energy

Source: Yahoo! Finance.

Will Valero Energy keep fueling up?
Analysts have been increasingly optimistic about Valero's prospects for its fourth quarter, boosting earnings-per-share estimates numerous times over the past three months and adding $0.12 per share to their guesses in the process. The stock has been equally bullish, gaining almost 35% since late October.

The key to Valero's success lately has been the huge spread between oil prices in the U.S. versus the rest of the world. With Brent crude fetching as much as $20 per barrel more than West Texas Intermediate, Valero has been able to sell refined products around the world at a big markup to its costs.

What investors should look closely at, though, is why Valero hasn't seen even bigger gains. As strong as a near tripling of earnings per share in the past two years may seem, its competitors are making it look slow by comparison. HollyFrontier (HFC) has seen earnings rise nearly 800%, while Phillips 66 (PSX -0.40%) took 2010 pro forma earnings of about $1 per share and turned them into nearly $8 last year, according to estimates. With the merger of Holly and Frontier and the spinoffs of Phillips 66 and Marathon Petroleum (MPC -0.69%) from their former integrated-oil parent companies, Valero runs the risk of getting left behind if it doesn't step up its game.

In Valero's earnings report, investors should look at the potential impact of exports of both crude and refined products on its industry. With the reversal of the Seaway pipeline of Enbridge and Enterprise Products Partners (EPD 0.21%) offering the chance to export crude, equalization of U.S. and international oil prices could cut Valero's margins substantially. In the long run, such a move seems inevitable -- the question is how long Valero can benefit before it happens.

Click here to add Valero Energy to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.